ii view: outsourcer Capita's half-year growth fails to impress

It boasts contracts with the Army, Navy, and the BBC, but its shares are down year-to-date. We assess prospects. 

First-half trading update to 30 June

Chief executive Jon Lewis said:

“I am pleased with the progress we have made across Capita since the start of the year. Our operational performance remains strong, with impressive levels of delivery across our client base; and we have secured important contract renewals and new work.

“Our financial performance has remained in line with our expectations, as we have maintained revenue growth in 2022, while continuing to reduce debt and strengthen the balance sheet. We continue to expect further strong progress in the second half of the year in revenue, profit and cash flow generation.”

ii round-up:

Outsourcing company Capita (LSE:CPI) today flagged first half revenue growth of up to 1%, in line with management’s own forecast. 

The FTSE 250 company continues to expect full-year 2022 profits to be weighed towards the second half, with a reduced adjusted profit margin reflecting the impact of prior-year contract losses, declines in its closed book Life and Pensions business and operational changes for its Army recruitment contract.

Shares for Capita fell by more than 3% in UK trading, leaving them down by around a quarter year-to-date. Shares for rival outsourcer Serco (LSE:SRP) are up by around a third during 2022. The FTSE All World index is down almost a fifth. 

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Capita operates across the three divisions of public service, private sector or its experience division, and non-core portfolio businesses. Public sector revenues rose 2% during the five months to the end of May. Experience revenues on the same basis fell 3%, better than their prior year performance, while non-core portfolio revenues rose 5%, helped by recoveries from the pandemic. 

Notable deals during the period included the renewal of its BBC TV licencing contract for £456 million, further work totalling £51 million for the Northern Ireland Education Authority, and a new contract win with Scottish Power worth £63 million over five years.

Capita remains on track to deliver positive free cash flow during the full year, with a material reduction in net debt also expected. First half results are scheduled for 5 August. 

ii view:

Employing over 50,000 people, Capita provides a combination of both digital and consulting services to companies, local authorities and the government, largely in the UK. Customers for its public sector division include education departments, justice and transport and defence services such as Royal Navy training. Experience, or private sector customers, include utility companies, financial services firms and telecom providers, while customers for its now non-core division include property providers and travel related firms. 

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For investors, a highly uncertain economic outlook offers a difficult backdrop. Costs for businesses are rising generally, the dividend remains suspended, while a 1% rise in revenues for this latest period is very modest.

That said, the need for both governments and companies to reduce or constrain costs should leave the option of outsourcing on the table. The group’s own transformation programme also remains going, while a diversity of customers offers reassurance. On balance, and while some caution still looks sensible given Capita's chequered history, a discounted valuation may now begin to appeal to more speculative longer-term investors. 

Positives: 

• Diversified customer base
• Looking to reduce net debt

Negatives:

• Uncertain economic outlook
• No dividend payments

The average rating of stock market analysts:

Buy